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Kum &amp; Go Using Sale-Leasebacks to Fuel Expansion

Retailer sold and leased back 45 of its 431 stores over the last three years.

January 21, 2009, 07:00 pm

WEST DES MOINES, Iowa -- Kum & Go is fueling aggressive growth plans with a sale-leaseback strategy for many of its newer convenience stores. Up to 75 percent of the chain’s new and remodeled stores will be sold and leased back as they come online in the next few years, according to a report by the Des Moines Register.

Since the West Des Moines-based company adopted the strategy three years ago, it has sold and leased back 45 of its 431 stores, chief financial officer Craig Bergstrom told the paper.

The arrangements are a win-win deal for investors and the company, said Todd Millang, a commercial real estate broker with CB Richard Ellis/Hubbell, who handled several of the transactions. Investors get to own a piece of property with a secure tenant who takes care of virtually all the responsibilities, including maintenance, taxes and upkeep, while Kum & Go gets back capital that it can invest to build additional stores, he said.

"It's a good deal for me," said Jack Stapleton of Ankeny, Iowa, who owns a Kum & Go store site in his hometown and just purchased another location in Johnston.

Companies such as Walgreen Co. and some fast-food chains have moved to the leasing concept in recent years for similar reasons, Millang said, noting the model appeals to a strong retail business such as Kum & Go that is in expansion mode.

Kum & Go is using the leaseback strategy for new stores, as well as stores that it remodels and enlarges. In the case of a new store, Kum & Go finds the site, hires a contractor and builds the store. After the store has opened, the company finds real estate investors, such as Stapleton, who purchase the property at market value and lease it back to Kum & Go on a 15- or 20-year lease, Bergstrom told the newspaper.

Typical sales have ranged from $1.8 million to $2.3 million, Millang said, with one store selling for as much as $2.8 million. The leases provide protections for the investor owner if Kum & Go moves to a different site during the lease period, the broker said.

Recent leases provided investors the equivalent of a 7.5 percent return on their investment, with options for 1.5 percent annual increases every five years. Any appreciation in the value of the property goes to the investor owners, who also can depreciate the property for tax purposes, according to Millang.

So far, about a third of the investors who have purchased store sites are Iowans. The other owners are individuals or investment groups based outside Iowa, the broker said.

Kum & Go's 431 stores are spread out over 12 states. CEO Kyle Krause put the company on an aggressive growth strategy shortly after taking over in 2003, the report stated.

In 2004, Kum & Go purchased 76 Git-N-Go stores in Missouri and Oklahoma for $8.7 million. Since 2005, though, the chain has focused on remodeling its older stores and building others. In the past three years, 56 stores have been built or rebuilt.

Two new Kum & Go stores, in Clear Lake and Tipton, Iowa, are currently available for sale to investors on leaseback deals, Bergstrom told the Register.